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PacifiCare pulls out of small-business plans

As part of a larger effort to boost lagging profitability, PacifiCare Health Systems Inc. is dropping out of small-business health insurance purchasing alliances in California and Colorado.

PacifiCare of California will leave PacAdvantage, a 145,000-member insurance buying coalition, at the end of this year. Meanwhile, PacifiCare of Colorado decided to leave a program in that state, the Cooperative for Health Insurance Purchasing, because it was hard to administer.

Those moves came shortly before Robert O’Leary, president and chief executive of Santa Ana-based PacifiCare Health Systems, announced that the company might break even or report a loss of up to 10 cents a share for the third quarter ended Sept. 30. O’Leary blamed the disappointing results on higher healthcare costs and lower Medicare reimbursements. PacifiCare is scheduled to report its third quarter results Nov. 9.

Investors hammered PacifiCare’s stock in last week’s trading after that news broke. The First Call/Thomson Financial analyst survey had predicted that PacifiCare would report third-quarter earnings of $1.90 a share.

O’Leary said, among other things, that PacifiCare has frozen its Secure Horizons Medicare HMO enrollment in several Texas and Washington state counties and is considering doing the same in nearly all of its operating areas, with three significant exceptions.

“We will not freeze Los Angeles, Orange County and San Diego. We have done very well there,” O’Leary said.

PacifiCare’s rising costs have come about primarily because it is changing its hospital payment system. A year ago, most of PacifiCare’s HMO members were covered under capitation arrangements that gave hospitals and other providers set amounts of money per patient for treatment. Under the capitation model, providers accepted the financial risk of actual costs being higher.

Today, however, “our business model of capitation has shifted significantly to shared-risk,” O’Leary said. Under a shared-risk arrangement, PacifiCare pays higher fees when the cost of healthcare increases for its members. The shift came about in part because hospitals were complaining about not getting enough money from the HMO and threatening to cancel their contracts,but it also happened at a time when both costs and members’ hospital usage grew.

O’Leary characterized the situation as “a moment of important concern,” but declined to speculate on how it would affect the company in this year’s fourth quarter or 2001. O’Leary said, however, that PacifiCare Health Systems has $11 billion in revenue, $2 billion in equity and generated $120 million in cash flow in July and August.

As for the purchasing coalition situations, PacifiCare of California was among several large health plans, such as Kaiser Permanente and Health Net, that participate in PacAdvantage. PacAdvantage offers a range of health insurance products and plans to businesses with two to 50 employees, said Chuck Kiskaden, its Orange County-based director of sales and marketing.

The alliance is affiliated with the nonprofit Pacific Business Group on Health, a San Francisco-based healthcare purchasing coalition that counts the University of California, California Public Employees Retirement System, Bank of America and Chevron asmembers.

PacifiCare of California’s leaving PacAdvantage fits in with the overall corporate decision of looking over all areas of the business, said Tyler Mason, a company spokesman.

“We are supportive of purchasing pools, but PacAdvantage doesn’t fit our business model going forward,” Mason said.

Kiskaden said PacAdvantage is at a loss to explain why PacifiCare of California decided to leave the alliance, noting the entities were in negotiations. He wasn’t able to give a specific number for PacAdvantage members in Orange County, but said approximately 45% of its total membership lives in Southern California.

PacAdvantage officials said to their knowledge, PacifiCare of California is the only health plan that’s withdrawing from the alliance for next year.

PacifiCare of California has around 2.4 million members statewide in its commercial and Secure Horizons plans. Mason said only around 9,000 of those were involved with PacAdvantage.

PacifiCare of Colorado, meanwhile, decided to drop out of the Cooperative for Health Insurance Purchasing in early October. Spokeswoman Janet Reese said PacifiCare of Colorado is leaving because the cooperative “takes a high level of administrative resources.”

Reese said PacifiCare of Colorado wants to be able to serve small employer groups and is looking at ways to streamline and more aggressively manage such business. She added, however, that only 3,750 of PacifiCare of Colorado’s 427,000 members belong to the cooperative.

Like PacAdvantage and Orange-based CaliforniaChoice, the Cooperative for Health Insurance Purchasing program allows small businesses to join together for increased buying choices. That group’s participating plans include Kaiser Permanente, Anthem Blue Cross and Blue Shield and Aetna U.S. Healthcare.

Tom Rockers, a Cooperative for Health Insurance Purchasing official, said PacifiCare of Colorado wasn’t being bought by cooperative members. Rockers noted that the cooperative performed administrative functions for its participants, such as maintaining broker and client relationships and paying bills.

Separately, PacifiCare of California said it and the Greater Newport Physicians group medical practice reached mutual agreement on a new contract for 2001. Greater Newport Physicians, which operates out of Hoag Memorial Hospital in Newport Beach, said in the summer that it would not renew its contract with PacifiCare of California for 2001 unless it got higher rates from the HMO. Greater Newport Physicians serves around 40,000 PacifiCare commercial HMO and Secure Horizons members in Orange County.

Several industry observers noted that the situation with Greater Newport Physicians and a similar dispute with St. Joseph Health System demonstrate growing financial tensions among HMOs, hospitals and doctors’ groups. n

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